Second 2020 Bank To Fail Was Struggling Long Before Coronavirus


West Virginia state regulators closed The First State Bank this Friday, April 3rd. This is the second bank to fail in 2020, and it’s the first bank to fail in the coronavirus crisis. Even though this bank failed in the coronavirus crisis, it had major financial problems long before the pandemic started. Based on the 2019 Q4 bank call reports from the FDIC (the latest available), this bank had the highest Texas Ratio of any bank in the nation (1,050%). Any bank with a Texas Ratio greater than 100% is considered at risk.

The coronavirus crisis will likely result in a large increase in loan defaults and other conditions that will stress banks. Help from the Federal Reserve, the Treasury, the FDIC and other regulators should prevent mass bank failures, but the number of bank failures will likely increase over the next year. An example of what may occur can be seen in the bank failure data during and after the 2008 Financial Crisis. This is shown below.

Number of bank failures around the time of the 2008 Financial Crisis:

  • 2006: 0
  • 2007: 3
  • 2008: 25
  • 2009: 140
  • 2010: 157

Most banks failed in 2010, two years after the crisis reached its climax in 2008. Thus, it will likely take some time before we see the first bank failure that’s the result of the coronavirus crisis.

We are still in a relatively calm period for bank failures that began in 2015. From 2015 to 2019, there have been no years in which more than 8 banks have failed. No banks failed in 2018, and only four failed in 2019.

Details of The First State Bank Failure

According to this FDIC press release, “The First State Bank had approximately $152.4 million in total assets and $139.5 million in total deposits. In addition to assuming all of the deposits, MVB Bank agreed to purchase approximately $147.2 million of The First State Bank's assets. The FDIC will retain the remaining assets for later disposition.”

Only Uninsured Brokered Deposits May Be At Risk

All deposits that were directly held at the failed bank, even those above the FDIC limits, were transferred to the new bank as described in the FDIC’s FAQs:

No one lost any money on deposit as a result of the closure of this bank. All of the deposits, regardless of dollar amount, were transferred to MVB Bank, other than the Cede & Co. deposits which will be returned to them.

Both insured and uninsured deposits that were directly held at The First State Bank were transferred to MVB Bank. Thus, even depositors who had over the insurance limits had no loss in this failure. However, brokered deposits managed by Cede & Co. were not assumed by MVB Bank. Consequently, there is a possibility that someone may have lost money on a portion of their brokered deposits that exceeded the FDIC coverage limits. It demonstrates that uninsured brokered deposits are more at risk than uninsured deposits directly held at a bank.

Past Cases When All Uninsured Deposits Were At Risk

Occasionally, banks fail and uninsured deposits directly held at a bank are not covered. That happened last year in the first 2019 bank failure. In that case, the acquiring bank only agreed to assume insured deposits. Depositors who had over the insurance limits were at risk of losing some or all of their uninsured deposits. In previous years, banks have also failed without an acquiring bank. In those cases, the FDIC liquidates the bank and sends checks to depositors of only their insured deposits.

Customer Access To Deposits

Another benefit when the FDIC arranges for an acquisition of a failed bank is that the new bank will typically allow customers of the failed bank to continue to use their accounts without any immediate changes. According to MVB Bank’s press release on this acquisition:

Over the weekend, First State clients will be able to access their money by writing checks, accessing online banking or using an ATM or their debit card.

CD Rates May Be Reduced

For this bank failure, the only concern for insured depositors are those with CDs that had high rates. First State Bank had been offering long-term CDs with yields as high as 2.50% in 2019. Those rates may not last as the FDIC describes in its FAQs:

Interest on deposits accrued through close of business on Friday, April 3, 2020, will be paid at your same rate. The First State Bank’s rates will be reviewed by MVB Bank and may be lowered, and you will be notified in writing of any changes. You may withdraw funds from any transferred account, regardless of whether your interest rate changes, without early withdrawal penalty until you enter into a new deposit agreement with MVB Bank.

Cause of the Failure had given The First State Bank an “F” grade on its financial health based on data from its December 31, 2019 call reports. As mentioned above, this bank had the highest Texas Ratio in the nation (1,050%). Any bank with a Texas Ratio greater than 100% is considered at risk.

The failure of The First State Bank differed from the first bank that failed in 2019 and the last bank to fail in 2017. In both of those cases, fraud was the primary cause of the failures. Due to the fraud, the financial health grades didn’t help predict the failures. Also, the fraud caused the acquiring banks to decide to only assume the insured deposits. Customers at those banks with uninsured deposits were at risk of losing those deposits.

Those previous two bank failures were an important reminder why everyone should make sure that their deposits (total of both principal and interest) are kept below the FDIC and NCUA insurance limits at each of their banks and credit unions.

Credit Union Liquidations and Conservatorships

There have been no new credit union liquidations or conservatorships since the first half of last year. One credit union was liquidated in March 2019, and two credit unions were placed into conservatorship in April and May. In a conservatorship, the NCUA takes over the management of the credit union with the goal of resolving the issues. If the issues cannot be resolved, the NCUA will either arrange for a merger of the conserved credit union into a healthy credit union or liquidate the credit union.

External References:

DepositAccounts References:

Related Pages: bank health ratings

Predatory Depositor
  |     |   Comment #1
Tiny bank, with tiny amount of deposits failing before the flood comes. Not difficult to negotiate a transfer of their entire balance sheet to another bank so that even uninsured deposits are not immediately lost.

Try doing that with a bank with a billion dollars on deposit in the middle of a failure storm. I wouldn't count on saving your uninsured deposits under those conditions. The worst part as I'm concerned is that it's nearly impossible to tell if you even are insured. It's up to you to navigate your way through the arcane rules of FDIC and NCUA, deal with FI CSRs who often give conflicting information and don't know what they're talking about, and try to figure out how to control what the FI has in its records when you have no control over it. Good luck.

The entire insurance system needs to be overhauled. FIs should be responsible for complying with the insurance rules and the insurers should take the risk if they're not, not depositors. An FI should not accept deposits unless they meet insurance requirements so as to ensure that any money you have any bank or credit union is definitely insured. Otherwise it's impossible to tell if you're insured, until it's too late.

Point two is that this crisis is completely different than the 2008/2009 crisis. That crisis started because the government made deals with the banks requiring them to make loans to people who couldn't pay them back in exchange for guarantees and for overlooking the irresponsibly risky financial instruments Banks were engaged in trading.

This crisis was not triggered by the government and the banks as that one was. It was triggered by a negligent (at best) act of cover-up by the Chinese government that allowed a biological nuclear bomb to detonate all over the planet.
Bernie Madoff aka Boeing's Billionaire President
  |     |   Comment #3
Amen brother. Those mortgage bankers were unwillingly duped into making billions and walking away.

Innocent as a baby's bum, each and every one.

Predatory Depositor
  |     |   Comment #4
I was in the mortgage banking business in the early 90s. I will never forget the day the CEO came into the meeting room and told us that we needed to come up with new loan programs for people who didn't have the means to pay them back because Congress passed laws making it discriminatory not to lend to them. I thought he had lost his mind. But it was real. Discriminatory not to lend to people who don't qualify for the loans? Let someone with no assets and earning $30k a year buy a million dollar home? Of COURSE it's discriminatory! I knew at that moment that the economy would eventually be doomed.
Maurice Greenberg
  |     |   Comment #5
Now, Mr. Predatory Depositor.

If Obama was forcing your CEO to give million dollar loans to people making $30,000 per year.

Why was there so much mortgage fraud? Why did you people fill out so many fraudulent loan applications, lying and overstating income, when the government was literally forcing you to give million dollar loans to poor folk?
Maxine Waters
  |     |   Comment #6
It is true, I forced Mr. Predatory to give million dollar loans to poor people.

I don't know why he lied on the mortgage applications, since I literally forced him with a gun to his head to give away the loans. Good question.
Maurice Greenberg
  |     |   Comment #7
Da mn it Maxine, you ruined my company by forcing Mr. Predatory to give billion dollar loans to poor people.
Maxine Waters
  |     |   Comment #8
Sorry baby. Socialists gonna socialize.

You look fine. You been working out?
  |     |   Comment #9
PD and others!     Most are not recognizing the concept of a lender should be looking at the value of a home for owner occupied buyers. IF you live in a state with Anti-Deficiency Act legislation the income is really irrelevant! I saw many purchase agreements during 2008-2010 timeframe that provided a “stated income” deal! PD step up to the plate you or do you not know what those Acts provide? Over 15 states!  The concept is also relevant to the notion...

NEVER pay a lot (if any) down in those states, buy and close and move into the house, see what defects surface (if any), and move knowing u have no personal liability. The lender knows the rules but buyers don’t,
PS Your ceo was right in the noted states..and a “failure” in not training you all in the relevant rules!
Predatory Depositor
  |     |   Comment #10
I've never seen a mortgage underwriting process that doesn't consider LTV as a factor. That is completely separate from the determination of whether or not the borrower has the means to service the debt. So I think your point is irrelevant to my point. At that time I was actually in secondary marketing trading and analyzing MBS instruments. At the same time we were being required to write the faulty loans we also had to come up with new instruments to bundle them and trade them. It was a gigantic mess. Congress knew it, bankers knew it. Congress did it to score political points with certain constituencies and the banks did it to make money. It was a time bomb just looking for a trigger. A decade or so later it found it.
Lou Ra Neari
  |     |   Comment #14
Wow, so Maxine Waters invented mortgage securitization!

You should update her Wikipedia profile, Mr. Predatory!

Weird how it took forty years for you to create the Liar Loan, and still not sure why you had to do that. Care to explain?

Choice has been rambling about non recourse mortgages for a while now, this was just another opportunity.
  |     |   Comment #2
Yes, that bank was in very, very bad shape. Should have been closed months before this!
  |     |   Comment #11
too big to fail?
how about navy federal credit union?
no credit union could absorb that institution
and it could take the NCUA down with it

Predatory Depositor
  |     |   Comment #13
I think NFCU would be the last credit union to fall. It's a brilliantly managed institution... Maybe the best in the industry. Recently opened an account there and was duly impressed.
Andrew Fastow
  |     |   Comment #15
Yes, never mind Navy is still offering a 3% add on CD. Brilliant.

Navy does explicitly state interest is paid only from earnings, so it can stop paying interest instead of declaring bankruptcy. That is smart.
  |     |   Comment #12
I think Orion Federal credit union is next! They are hurting so much that they are stealing money from customers by backdating the interest rate change, Instead of giving 3% interest.
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